I bought a few shares of Veeco Instruments (Nasdaq: VECO ) a while back and just filed them away, expecting that a cyclical wave would eventually take my shares for a ride. But even after Tuesday's 11% shellacking, I only have a small gain so far. After digging through the results that Veeco posted on Monday, it looks like the cyclical uptick I'm hoping for won't occur in 2006. While the company's fourth-quarter and full-year results show improvements, Veeco's weak guidance for the first quarter of this year raises question marks.
It's not all bad news; Veeco did beat expectations on both revenue and earnings. Fourth-quarter revenues were $112.8 million, compared to $103 million a year ago, while earnings came in at $2.7 million (nine cents per share). For the full year, Veeco lost $897,000 on $410 million in sales.
But unlike peer FEI (Nasdaq: FEIC ) , which recently reported a strong book-to-bill ratio of 1.14, Veeco's fourth-quarter book-to-bill ratio was just 0.91. (That still improved upon the value of 0.84 at the end of Q3.) In addition, management gave a weak revenue forecast of $90 million to $95 million for the current quarter, comparable to year-ago revenue of $93.9 million. Despite the weak sales expected in Q1 2006, the company does expect new product introductions to drive a better performance in the second half of the year, with revenues growing by 8% to 10% for fiscal 2006.
Trends look promising for each of Veeco's major markets: data storage, semiconductors, scientific research, and high-brightness LEDs. The latter sector suffered in 2005, but Veeco claims it's improving, as high-brightness LEDs made by firms like Cree (Nasdaq: CREE ) and LumiledsLighting increasingly appear in automotive headlamps and the backlighting of LCD TVs. Market research firm Strategies Unlimited predicts that this sector of the LED market will grow between 10% and 15% in the next five years.
Another favorable trend is the transition to perpendicular recording among hard drive makers like Seagate (NYSE: STX ) and Western Digital (NYSE: WDC ) . In 2005, sales to data-storage customers represented 41% of Veeco's revenues. In addition, semiconductor manufacturers are expected to increase capital spending this year as they manufacture increasing numbers of chips with linewidths at or below 90 nanometers. Some of those dollars should make their way to Veeco. (The company also makes products that are used by nanotechnology research labs, but sales have been slow; the commercial applications of nanotechnology really haven't taken off yet.)
Given these positive trends, I believe Veeco's forecast that new products will drive strong growth later this year. While I don't see anything on the horizon that gives this stock 10-bagger potential, a double by the end of the decade would likely beat the market.
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